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The Why and How of Tax-Free Employer Student Loan Assistance

The Why and How of Tax-Free Employer Student Loan Assistance

Employers now have an expanded opportunity to support employees with one of their most pressing concerns – repayment of student loan debt. With approximately 44 million former students in the U.S. struggling to repay over $1.6 trillion in outstanding educational debt, there have been many reasons for employers to consider offering student loan benefits – and thanks to recent legislative changes, there’s one more.

With the Consolidated Appropriations Act, 2021, signed into law at the end of 2020, the ability for employers to offer tax-free student loan repayment for employees through Educational Assistance Programs has been extended for five years – until January 1, 2026.

It was a provision in the CARES Act in March 2020 that initially expanded the definition of “eligible education expenses” in Section 127 of the Internal Revenue Code to go beyond employees’ tuition, books, and fees to cover student loan repayment assistance, as well. Through January 1, 2026, up to a total of $5,250 annually in eligible education expenses, including student loans, can be paid by employers and excluded from an employee's income through Section 127 Educational Assistance Programs.

[Related: Back to School Means it's Time to Save]

The why.

In addition to being able to offer student loan payments free of income and payroll tax and as a tax-deductible business expense, here are three reasons for employers to consider offering student loan repayment assistance to employees.

1) Recruitment.

With only 8% of employers currently offering student loan repayment benefits, those employers who do provide student loan assistance will stand out in the recruiting process.

2) Retention.

With 30% of working class Americans changing jobs every twelve months, offering a benefit like student loan repayment can foster loyalty and minimize turnover. Beyond this, satisfied employees can be a valuable source of high-quality employee referrals who tend to stay longer at companies.

3) Diversity and inclusion.

With greater student loan stress on women and Black employees, offering student loan assistance can help with racial and gender equity.

[Related: Solving the Savings Shortfall]

The how.

Here are three ways employers of all sizes can help employees who are struggling to prepare for or repay the cost of higher education.

1) Amend or establish.

Amend an existing 127 Educational Assistance Program to include student loan repayment of up to $5,250 a year, or establish a program if one is not already in place.

2) Offer or match.

Offer payroll deduction to 529 plans along with an employer contribution, or match to help employees save for higher education and avoid or minimize student loan debt.

3) Incorporate or provide.

Incorporate student loan and/or 529 contributions into a rewards and recognition program and/or provide a 529 plan contribution as a gift when employees welcome a new child into their family.

With the recent expansion of tax-free student loan benefits and with 75% of employees ranking student loan and 529 college savings support among the top three desired employer benefits overall (23% of which rank these as second only to health benefits), there’s no better time for employers to explore one or more options to help employees with the cost of higher education. These benefits are a win/win for employers and for employees.

[Related: Five Ways to Do More Good (And Save On Taxes, Too)]


Patricia Roberts has helped tens of thousands of families prepare for the cost of higher education through her leadership in nearly every aspect of the 529 college savings arena over the past 20+ years. She has authored a top-selling new release called Route 529: A Parent's Guide to Saving for College and Career Training with 529 Plans, writes for Thrive Global and other publications, and serves as Chief Operating Officer at Gift of College, Inc. You can follow her on LinkedIn and Instagram.

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